Community bankers are pointing to national rate caps as an example of how regulators struggle to quickly adapt to change.
Under the decade-old rate-cap rule, less-than-well-capitalized banks are barred from paying interest rates that significantly exceed the prevailing rate in the market where the deposit would be accepted. National rate caps apply to out-of-market deposits.
The Federal Deposit Insurance Corp, in an advance notice of proposed rulemaking, is requesting feedback as part of a comprehensive review of the caps. The comment period ends on May 7.
Bankers believe the rule is another example of
“This is a train wreck that bankers have seen a mile away, but regulators are slow to understand how flawed and antiquated their methodology for calculating rate caps has become,” said Jim Rieniets, president and CEO of InsBank in Nashville, Tenn. “Community banks can expect frustrating discussions on liquidity with rank-and-file examiners in the coming quarters.”
While community banks typically compete in very small markets, national rate caps seldom reflect local competition or take into account competitors such as credit unions and fintech, said Chris Donnelly, president and CEO of Bank of the Prairie in Olathe, Kan.
That may be a symptom of a larger problem, community bankers said.
Regulators, in general, are reactive to small banks' issues, and they tend to focus on findings rather than preemption, said Danny Payne, a consultant and former Commissioner of the Texas Department of Savings and Mortgage Lending. Though regulators have copious amounts of data, they often fail to fully utilize it to address industry needs or future issues.
“By mere nature of the beast they're reactionists,” Payne said.
The FDIC recognizes that community banks play a pivotal role in the economy, and it seeks to promote open dialogue with those banks and provide clear guidance on its safety and soundness and consumer protection regulations, said spokesman David Barr. The agency has an advisory committee on community banks and offers a number of resources to those institutions.
"We are constantly assessing the landscape of our financial system, as well as the specific regulations that we have put into place," Barr said.
Donnelly, at the $141 million-asset Bank of the Prairie, said the FDIC likely moves as fast as it can while trying to craft rules without catering to individual banks. That would only slow the pace of rulemaking.
“Hopefully the FDIC will recognize that all banks just don’t fit inside one set of rules and bigger institutions have the ability to weather the regulatory storm much better then small banks,” Donnelly said.
The Independent Community Bankers of America is preparing a formal comment on the rate cap issue, said Chris Cole, the association's senior regulatory counsel. The problem is the divergence between national rates caps, prevailing Treasury rates and what a bank actually has to pay to remain competitive.
“The caps are not nearly as high as they should be,” Cole said.
Another issue is that the caps are based on deposit products at all bank branches. Big banks that have nationwide networks can tilt calculations in their direction. The calculations do not take into account promotional rates, which are typically much higher than standard rates.
Rieniets, at the $517 million-asset InsBank, said small banks are operating on the most unequal playing field he's ever seen due to “the convergence of obstacles too numerous to fit into a standard sentence.”
Those challenges include legislation intended for “even-too-bigger-to-fail" banks that evolves into regulatory best practices, and competition from fintech firms that are not subject to regulatory scrutiny, Rieniets said. “I could keep going with the list of challenges, but suffice it to say that small banks are going to have to be able to accomplish a number of objectives to be relevant — or even exist — in the coming years."
Those objectives include operating efficiently enough to pay competitive deposit rates and making sure the bank has a legitimate growth story tied to attractive markets, a niche strategy or acquisitions, industry observers said.
Small banks have made great strides telling their story to legislators and regulators, said John McWeeney Jr., president and CEO of the New Jersey Bankers Association. As a result, virtually all federal regulators have had a more targeted focus on issues specifically related to community banks.
More work must be done to educate regulators, and the rate cap is a great example of that need.
“We’re hearing more anecdotal stories that examiners are raising the national rate cap issue in discussions with well-performing banks when it’s intended for lower-performing institutions,” McWeeney said.
The banking industry, through national and state trade associations, has raised the issue with the FDIC and has requested more dialogue to make sure community banks are not harmed, he said.
Rieniets, an admitted pessimist who believes community bank consolidation will accelerate, hopes his dire predictions will be proven wrong.
“If investor sentiment is a good proxy for predicting the direction of business and industry, then the relative absence of interest in de novo banking by professional bank investors may speak volumes about the future of community banking,” Rieniets said.
